# Working Capital Estimation Based on Cash Cost
This is an alternative approach to estimating working capital. The key insight: the funds actually blocked in current assets such as debtors and finished goods are less than their book value, because that value includes profit and non-cash costs.
## The logic
- For current assets valued at selling price (debtors), the blocked funds = cost of sales, not sales value. The profit element is not a fund outflow.
- For costs, some items are non-cash (e.g. depreciation) and should be excluded too.
Under this approach:
- Debtors are computed as a percentage of cash cost, not of sales value.
- Finished goods are valued at cash cost (non-cash costs excluded).
## Step-by-step illustration
1. Sundry debtors (at sales value) = ₹1,00,000
2. Cost of sales = ₹75,000 → so ₹25,000 is profit (not funds blocked)
3. Within the ₹75,000, depreciation = ₹5,000 (non-cash)
4. Actual funds blocked = ₹75,000 − ₹5,000 = ₹70,000
So ₹70,000 is the real amount of funds required to finance debtors worth ₹1,00,000.
## Takeaway
> Cash cost = Total cost − Non-cash costs (depreciation, amortisation). Debtors and finished goods should be financed at cash cost, giving a lower (more accurate) working capital figure.